Matter of Steele, Adv. No. 82-0038.
| Decision Date | 14 February 1983 |
| Docket Number | Adv. No. 82-0038. |
| Citation | 27 BR 474 |
| Parties | In the Matter of Kenneth A. STEELE and Diana L. Steele, Debtors. Michael E. KEPLER, Trustee, Plaintiff, v. Kenneth C. STEELE, Doris A. Steele, and Bank of Sun Prairie, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Michael Kepler, Paskin & Kepler, Madison, Wis., trustee.
Robert Salinger, Petrie, Stocking, Meixner & Zeisig, S.C., Milwaukee, Wis., for defendants Kenneth C. and Doris A. Steele.
Robert Brill, Aulik & Brill, S.C., Sun Prairie, Wis., for defendant Bank of Sun Prairie.
DECISION ON MOTION FOR SUMMARY JUDGMENT
Debtors Kenneth A. and Diana L. Steele filed a chapter 7 petition on October 29, 1981, listing on their schedule of assets an interest in a residence on two parcels in Dodge County, Wisconsin. This adversary proceeding was brought to resolve competing claims to that residence ("the property"). The debtor's parents, Kenneth C. and Doris Steele ("parents") claim that they, rather than the debtors are the owners of the property. The Bank of Sun Prairie ("Bank") claims a first and paramount mortgage interest in the property. The trustee in bankruptcy seeks to characterize the parents' interest as a mortgage, avoid that interest pursuant to 11 U.S.C. §§ 544(a)(3) and 547(b), and to preserve the parents' mortgage to gain priority over the bank's mortgage pursuant to 11 U.S.C. § 551. The proceeding is presently before the court on the trustee's motion for summary judgment.
The following facts, taken from papers filed in this proceeding to date, are here recited as construed most favorably to the parties opposing the motion. In July 1978, the parents were involved in negotiations to purchase the property from the First National Bank of Columbus ("First National"). To minimize the tax impact of the sale of the parents' property in Waukesha County, Wisconsin, an exchange was set up in which the debtor was to take title to the property as an agent or "straw man." The property was conveyed from First National to the debtor in October of 1978. Although the parents paid the consideration of $72,000.00, the debtor was the grantee on the deed and the owner of record.
On July 19, 1980, the debtor gave the Bank a mortgage on the property, as security for a promissory note of $212,000.00. The mortgage included the statement: "This is a second mortgage on each of the properties, and is subordinate to existing first mortgages and successor first mortgages." Whether the Bank had notice of any interest in the property claimed by the parents, and whether this statement was intended to subordinate the Bank to the parents' interest or to a then-existing mortgage on the property held by Farmer's Union Bank are disputed facts in this case.
On September 15, 1981, 44 days before debtors filed bankruptcy, a two-page document was recorded in the Dodge County Register of Deeds. The first page includes the following:
A hand written note appears beneath the quoted statement, by which the debtor, Kenneth A. Steele, promised to pay his parents $72,000.00 on demand with 9 percent annual interest.
The second page contains only the statement "this mortgage refers to the following described land:" followed by a legal description of the property and a notarization. No signatures appear on the second page.
Under 11 U.S.C. § 544(a)(3) the trustee has whatever rights a hypothetical bona fide purchaser from the debtor at the time of commencement of the case would have.
Thus, the rights of the parents in the property as against the trustee would be limited to those of which adequate notice is given under applicable law to defeat claims of a subsequent purchaser. Although 11 U.S.C. § 544(a)(3) vests the trustee with all of the rights that a bona fide purchaser could assert, the extent of those rights is determined by substantive state law. See 4 Collier on Bankruptcy ¶ 544.02 (15th ed. 1982).
In some cases, the application of 11 U.S.C. § 544(a)(3) has been relatively straightforward. For example, in In Re Hastings, 4 B.R. 292, 6 B.C.D. 401, 2 C.B.C.2d 88 (Bkrtcy.D.Minn.1980) the debtor gave a mortgage on his homestead in the form of a quitclaim deed. Applying 11 U.S.C. § 544(a)(3), the court held that since the defendant had taken no steps to record the mortgage under Minnesota law, the trustee could avoid the mortgage. See also In Re Washburn & Roberts, Inc., 17 B.R. 305 (Bkrtcy.E.D.Wash.1982).
The present case is unusual in that there was a recording. The dispute is whether that recording constitutes notice of the parents' claimed ownership interest in the property. If the document does not provide notice of the parents' interest, a purchaser could rely on the Wisconsin recording act,1 to defeat the parents' interest. In the recent case of Kordecki v. Rizzo, 106 Wis.2d 713, 317 N.W.2d 479 (1982), the Wisconsin Supreme Court defined a good faith purchaser:
To claim the benefits of sec. 706.08(1)(a) as a purchaser in good faith . . . (the subsequent purchaser) is deemed to have examined the record and to have notice of the contents of all instruments in the chain of title and of the contents of instruments referred to in an instrument in the chain of title. A purchaser in good faith is one without notice, constructive or actual, of a prior conveyance. Fallass v. Pierce, 30 Wis. 443, 469 (1872).
106 Wis.2d at 719-20, 317 N.W.2d 479 (footnote omitted).
Parents contend that the language of the agreement signed by the debtor was sufficient to put any prospective purchaser on notice that they were the equitable owners of the property. They point to the acknowledgment of their power to direct the sale, and the restrictions on the debtor's use of the property as security. This court is not persuaded that either of the noted characteristics is, in the context of the questioned document, an indication of ownership. The trustee correctly notes that the same language indicates ownership by the debtor, since it says "I will sell." Further, the trustee correctly observes that the document, taken as a whole, with the included promise to pay by the grantor has characteristics common to a mortgage. Finally, the internal characterization of the document as a mortgage in the preface to the legal description is entitled to be taken seriously by anyone inspecting the record. In the present case, a purchaser examining the filed document would only have notice of a mortgage interest claimed by the parents.
Just as a purchaser of property is deemed to have notice of all recorded instruments, he is also deemed to have knowledge of the rights of parties in possession of the property:
It is well established, possession of land is constructive notice and is sufficient to put the purchaser on his guard of whatever rights the possessor may have in the land if such possession is visible, open, clear, full, notorious, unequivocal, unambiguous, inconsistent with, or adverse to the title or interest of the vendor. . . . Such possession is considered constructive notice of the rights of the possessor, whether the possession is used for the purpose of charging a purchaser with notice of an outstanding equity or of an unrecorded conveyance.
Bump v. Dahl, 26 Wis.2d 607, 612, 133 N.W.2d 295 (1965). (Citations omitted.) The U.S. Court of Appeals for the Third Circuit recently reversed decisions by the Bankruptcy Court and the District Court and held that a trustee could be charged with knowledge of possession of property, to preclude him from asserting the rights of a bona fide purchaser under 11 U.S.C. § 544(a)(3). McCannon v. Marston, 679 F.2d 13 (3d Cir.1982). A case from the Bankruptcy Court for the Eastern District of Pennsylvania has construed McCannon to hold that the trustee could be considered not to have actual notice, but 11 U.S.C. § 544 did not provide the trustee any "protection" from constructive notice. In Re Jones, 20 B.R. 988, 3 BANKR.L.REP. (CCH) ¶ 68,742, at 80,989 (Bkrtcy.E.D.Pa.1982). Thus, in the present case if the parents were in possession of the property at the time of debtor's filing in bankruptcy, the trustee would have constructive notice of their claimed ownership, barring him from asserting bona fide purchaser status. See Bump v. Dahl, supra.
The parents acknowledge that they reside in Waukesha County, but claim that they were "recognized in the community as the owners of the property," and that the father maintained the property. The extent of possession necessary to place a prospective purchaser on notice has been held to be similar to that required for adverse possession. Miller v. Green, 264 Wis. 159, 163-64, 58 N.W.2d 704 (1952). In Miller, the Wisconsin court stated that actual residence on land is not necessary for constructive notice. However, that case involved farmland and the possessor was engaged in the "customary acts of possession which could be exercised as to unoccupied farmlands at such time of year." Id. at 164, 58 N.W.2d 704. Since the...
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